Most mortgages require you to have steady employment for a minimum of two years, which leaves out the people that started their business within the last year or so. Does this mean you are forced to rent and wait until your business is in operation for at least 2 years before you can apply for a loan? Luckily that answer is “no.” A non-qualified loan can get you the mortgage you need to purchase or even refinance a home.
What is a Non-Qualified Mortgage?
A non-qualified mortgage is a home loan that does not meet the minimum requirements set forth by the Dodd-Frank Act of 2010 which states that loans meet certain requirements that protect the borrower and the lender. These requirements include:
- A debt ratio that does not exceed 43 percent
- Proper proof of income
- Points that do not exceed 3 percent of the loan amount
- Standard amortization
If a person is self-employed and has only been self-employed for say 12 months, they would obviously violate the second requirement above, kicking them out of the Qualified Mortgage category. This does not mean that a loan is not available, though. It just means that the Qualified Mortgage is not an option, but a non-qualified loan is an option.
A non-qualified loan is one that does not meet the above requirements, whether one or all. It does, however, meet the Ability to Repay rules, which means:
- Your income was verified even if in an alternative manner
- Your employment was verified
- Your credit history was verified
The lender must be able to prove that you have “the ability to repay” the loan before funding it. Even if you are self-employed, these requirements can easily be met.
The Challenge of the Newly Self-Employed
The problem that many people that are self-employed run into is that they do not have enough of a history to get the loan. Not too many lenders want to take a chance on someone that just started out in their business because there is no history to show whether or not that person will be successful. A few ways to get around this include:
- Open a business within the same industry you worked for many years
- Open a business with a partner that has experience in the industry
- Show steady income for the time that you are self-employed, even if it is a short amount of time
- Have plenty of assets on hand to show that you have money to back you up should your business fail; lenders like to see between six and twelve months’ worth of mortgage payments on hand
- Have a good credit history that shows a history of timely payments for the last few years
These are just a few of the ways that someone newly self-employed can benefit from the non-qualified loan. The difference with this type of loan is that any lender that provides the loan is only working off of their own requirements; there are no investors or secondary markets to worry about. There are also no government agencies backing the loan up, such as the FHA or VA. This means that every lender can create their own requirements. It also means that some lenders will be tougher than others, but there are many lenders to shop with so that you can find the loan that fits your needs. Every lender has a different threshold for the level of risk they can take on, which means that what one lender might accept, another might not be able to.
The key factor in finding a non-qualified loan if you are newly self-employed is to make sure that your credit history is in good shape and that you have plenty of assets to show as a compensating factor in the event that your income were to become unstable. Every lender has something different to offer so shop with various lenders to see who is able to provide you with the best program to meet your needs.